A few years ago, the late Russian economist and former finance minister Yegor Gaidar, the architect of his country’s post-Soviet free-market reforms, gave a speech in which he pinpointed, to the exact day, when the U.S.S.R.’s goose was cooked: Sept. 13, 1985.

A quick history lesson is necessary here, but bear with me, because it ties directly into Russia’s aggression in Ukraine, the instability of Vladimir Putin’s grip on power, and why this has the potential to make him even more dangerous, at least in the short term.

In the wake of the 1970s oil-price shocks, demand for crude had been falling, while at the same time, both OPEC and non-OPEC countries were flooding world markets with oil. Saudi Arabia, having tried and failed to keep oil prices high by curtailing its own output, chose that day to abandon its policy of propping up prices. Within a year, oil fell close to 50 per cent to under US$15 a barrel, the equivalent of just US$31 in today’s terms.

As Gaidar explained in his 2006 lecture to the American Enterprise Institute, it was a death blow for the Soviet Union. By then, the Soviets depended on energy exports for most of their hard currency reserves, money they desperately needed to pay for foreign grain to feed their citizens, not to mention maintain their creaking empire. “As a result, the Soviet Union lost approximately $20 billion per year,” he said, “money without which the country simply could not survive.”

Putin’s invasion of Crimea is the latest chapter in his campaign of empire building. And once again, the whole mess of Russian ambition has been fuelled by energy exports. More than a decade of rising oil and gas prices nearly quadrupled the size of the economy to US$2 trillion, boosted incomes and enabled Putin to reconstruct Russia’s military might.

The country’s natural gas exports have been front and centre in the Ukraine conflict, after Russia said it would end the gas price discount it provides to the cash-strapped country. (Russia is Ukraine’s largest source of gas.) There is concern Putin could go even further and shut off the gas to Ukraine altogether, as Russia did during disputes in 2006 and 2009. The pipelines don’t end in Ukraine, either, but extend deep into Europe. This has triggered panicked headlines warning that, with a flick of the switch, Putin might shut off Europe’s supply of natural gas, used to heat homes and power factories.

Indeed, Russia supplies 35 per cent of Europe’s natural gas. Put that way, the balance of power would lie with Moscow. But here’s the other way to think about it: According to the U.S. Energy Information Association, Western Europe accounts for 76 per cent of Russia’s gas exports. It’s a relationship of economic interdependence, in other words, in which Russia may well ultimately hold the weaker hand.

That’s especially the case if the global energy revolution already under way continues. New discoveries and technologies such as hydraulic fracturing have boosted the supply of both oil and gas faster than anyone expected. It’s already shifting the balance of power in energy markets. Norway’s state-controlled Statoil is close to overtaking Russia’s state-run Gazprom in gas exports to Europe. As more terminals in Europe capable of handling liquefied natural gas are constructed, countries such as Qatar and Australia can increase shipments to the continent. Meanwhile, in the U.S., which has tight restrictions on oil and gas exports, but where production is soaring, there have been increased calls for those restrictions to be eased. Legislation before the Senate and House of Representatives would expedite gas exports to NATO allies.

Even Ukraine is in on the act. This year, energy giant Royal Dutch Shell is expected to drill the first wells of a US$10-billion shale gas project there. Within a decade, it may even be in a position to export gas to Europe. Putin’s belligerence in Crimea has only reinforced the importance of diversifying Europe’s energy supply away from Russia.

None of these projects offers immediate help, should Russia shut off Europe’s gas tomorrow. One can only hope the country’s own reliance on energy revenues forestalls that option. Oil and gas make up 70 per cent of Russia’s exports, while energy accounts for more than half of government revenues. Even before the Ukraine crisis and the talk of sanctions, lower oil and gas prices were already dragging Russia’s economy closer to recession. The World Bank estimates Russia’s economy grew just 1.3 per cent last year, down sharply from 3.4 per cent the year before.

And so Russia once again finds itself dangerously exposed to fluctuations in energy markets. None of this should be a surprise to a strategist like Putin. But it does mean that, if he is keen to reassert the Russian empire, and senses his days are numbered, he may feel he must act now while Russia’s energy wealth affords him that opportunity.

In the last years of his life, Gaidar was wary about the rise of post-imperial nostalgia in Russia, and its threat to the country’s stability. As Russian tanks rolled into Georgia in 2008, the year before his death from pulmonary edema, Gaidar saw what was at stake. “The situation is extremely dangerous,” he said. “The post-imperial syndrome is in full blossom. We have to get through the next five to 10 years and not start doing something stupid.” The danger is, Putin may feel his time is running out.

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About this author

Jason Kirby is a columnist and business editor at Maclean’s. Working in Toronto and Vancouver he’s covered money and politics for 13 years in papers and magazines and has been nominated for three National Magazine Awards.

How Russia’s energy problem fuels unrest

If oil is the fuel of the world economy and so intrinsically important to national well-being, financial and otherwise, then why do governments tolerate speculation by private traders who interests could very well be counter to the country’s best interests? Perhaps the price of crude would be better set by an international panel under the aegis of the UN, assuming that it could avoid the rampant corruption seen in other UN “world” organizations.

You can’t have any kind of an open market without allowing speculation. And without an open market, you do not have accurate pricing signals. And that courts disaster. Crude oil futures are not some murky, exotic derivative traded over the counter. They are very specifically defined contracts traded on open exchanges in NY and elsewhere.

But one has allowed Too-big-to-fail banks to speculate, and to become major traders and stockpilers/storers of oil.

There is a financialization tax by the banksters and the 1% on commodities trading, and they are protected from losses since they are TBTF and backed by the taxpayer. JP Morgan, Goldman Sachs, and Citi were some of the biggest commodities traders.

All these major banks have now been implicated in LIBOR rigging, and in commodity price rigging, and FX rigging.

There are legitimate reasons for actual producers and actual users of commodities to have a commodities futures market, where speculators are involved. But the the big banks dwarf the actual players in these markets, and have layered on top of it in opaque over the counter markets commodity and financial derivatives. The financialization part of the market wags the tail of the actual real part of the market.

This can of worms, which was opened by Bill Clinton and the Larry Summers gangs in the late nineties, with the elimination of Glass-Steagal, and commodity future modernization and the NON-REGULATION of derivatives has only been partially closed with Dodd Frank.

Bill Clinton pardoned Mark Rich, founder of Glencore, and one of the biggest commodity traders of the world. Eric Holder, Barrack Obama’s head of the Department of Justice, was the Clinton Administration official who arranged Mark Rich’s pardon.

Ask yourself why the banks were the main heating oil suppliers in the US Northeast?

Russia has much less to worry about than they did in the eighties, because they are much more integrated into the world economic system. It is mutual assured economic destruction if the United States and Europe take any sort of action against Russia now.

Putin took only what was absolutely critical to Russia’s security interests, and left the US and Europe the economic basket case that Ukraine will be. Ukraine was weak economically as it was, and most of its production was sold to Russia. It will be worse now that Russia will no longer buy, and the Ukraine will be left to the US, Europe, and the IMF. Putin will let the ethnic Ukrainians stew in IMF austerity.

Ukraine needed both the EU and Russia and instead it let itself be manipulated by the United States into a Sophie’s choice. Ukrainians desparately needed Russia and Europe to cooperate in Ukraine.

I don’t think Merkel can save the day here. The American Deep State has cracked the Ukrainian Humpety-Dumpety Easter Egg, and all the kings men aren’t going to be able to fix things for Urkaine.

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